Dollar reached a 14-year high
Following the US election results and Donald Trump’s win, the market is speculative about the US economic growth outlook as well as the timing of a US interest rate hike, considering Trump’s protectionist policies.
Trump has announced that he will spend $1 trillion on infrastructure construction. This spending, along with a reduction in taxes, is likely to give trade restrictions as well as the economy a significant boost, which could fuel inflation. Trump’s inflationary policies, combined with the already hawkish Federal Reserve, points to higher interest rates in the future. These sentiments have led to the upward trajectory of the US dollar (UUP), which reached a 14-year high on November 16, 2016.
Tech sector’s vulnerability to US dollar fluctuations
The above chart shows that IBM generates more than half of its revenue from outside the United States. Apart from IBM, Oracle (ORCL), Symantec (SYMC), and Microsoft (MSFT) are some of the leading technology players that derive a majority of their revenues from regions outside the United States. These regions include the EMEA (Europe, the Middle East, and Africa) and the Asia-Pacific. As a result, their top lines are significantly impacted by the appreciating US dollar.
Apart from significant revenue generation, cash parked overseas adds to these companies’ vulnerabilities to currency fluctuations.
Later in this series, we’ll discuss the growing cash reserves in the tech sector.